Quote of the Day: Oil & Recessions

Hard to argue with this:

"Nothing has been a more reliable indicator for an upcoming recession as the price of Oil. Every major bear market, every major economic decline has been preceded by a large spike in oil prices. The 73-74 recession, recession of beginning 80’s and the recession of 2000. Oil prices jumped 80% between 1999 and 2000. Oil prices have been the most important indicator of major economic disasters. Whenever Oil prices rise about 80% from year ago levels, a fair chance does exist that a recession/bear market will follow."   

Stephen Leeb

~~~

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Chris commented on Jun 26

    Unfortunately…he is only looking at the effect (high price) and not the cause (debased dollar).

  2. Chief Tomahawk commented on Jun 26

    Suddenly Homer’s scam of stealing used cooking grease doesn’t look so dumb. It’s probably cheaper to recycle now.

    I wonder whether Homer has an a.r.m. with Countrywide?

  3. MitchN commented on Jun 26

    Yesterday’s headline:

    Fed to Consumers: Drop Dead

    Today’s headline:

    Markets to Fed: Drop Dead

  4. rickrude commented on Jun 26

    Unfortunately…he is only looking at the effect (high price) and not the cause (debased dollar).>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    Although there is alot of debasing of the USD going on because of Greenspan and Bernanke,
    If by miracle, Bernanke were to contract the money supply by increasing interest rates,
    and kill off economic activity, it does not
    mean that all of a sudden, cheap oil will start gushing out of Depleted wells like the good ole days of the beverly hillbillies.

    There is no direct correlation between US money supply and the production of oil.

  5. DL commented on Jun 26

    As of November 5th, this will all be Obama’s fault.

  6. Eric commented on Jun 26

    This is a very weak argument. I see the role of oil in the 1970s recession. It was so sudden and artificial. But 2000? C’mon, it was a workout of speculative excesses in financial markets. And today? Consider this…Oil prices went up more than 80% from 2004 to 2006. According to this guy’s argument, that should have been enough to trigger a recession. But does anyone here think that oil at 2006 prices would be putting us into our current recession? The problem (like in 2000) is not energy prices, but speculative excesses in other asset markets — this time in real estate and consumer debt.

  7. Jonathan commented on Jun 26

    Or McCain’s fault.

  8. Sam Jacob commented on Jun 26

    wiley E. Coyote has just crossed the cliff. Don’t know when he will look down to begin the quick fall. But when he looks down,he will see Chinese and indian markets at the lows and Global economy struggling which will prompt the gravity to take control over the situation.
    Gravity always wins! All the Time!

  9. scorpio commented on Jun 26

    Bloomberg headline saying ‘worst June since the Depression’. mamacita

  10. algernon commented on Jun 26

    Eric & Chris have it right. To a significant extent, oil price is reflective of credit/money bubbles. This time globally. In terms of gold, oil hasn’t appreciated that much.

  11. John commented on Jun 26

    What is the relationship of oil and recessions prior to the 1970’s? Stephen Leeb has zero credibility.

  12. John commented on Jun 26

    How does something move from “Nothing has been a more reliable indicator” to only “a fair chance” in the same paragraph? And since when are recessions “major economic disasters”? Stephen Leeb has zero credibility.

  13. DownSouth commented on Jun 26

    ☺☺”The problem (like in 2000) is not energy prices, but speculative excesses in other asset markets — this time in real estate and consumer debt.”–Posted by: Eric | Jun 26, 2008 5:16:30 PM

    I’m with you Eric. This guy is in search of a scapegoat.

    Blame the oil companies, blame OPEC, blame the “speculators.” Blame anybody, but just don’t blame the people who caused the problem.

  14. simon commented on Jun 26

    If the market heads down too fast it will get an emergency rate cut. Ben hates bears. He also cares less about the dollar.

    However the price of oil is his enemy and with the price oil going up as the dollar goes down he has nowhere to go.

    Notice to all America. Visit Wall Mart. Buy a bicycle and maybe a nice broad rimmed hat as well.

    Don’t look in the shop windows as you ride along.

    By the way I pumped up the tires on my bike the other day. I’m reading up about organic farming too.

  15. michange commented on Jun 26

    @ Eric, DownSouth :

    IMHO you understand the argument for more than it really says.

    The quoted statement read ‘indicator’, which doesn’t at all mean causality (OIL=>RECESSION), might just invoke correlations (OIL<=>RECESSION) and generally stands even rather for effects (OIL<=RECESSION). This is quite an impressive, but very WEAK statement. This is why, as mentioned Barry, "Hard to argue with this" ...or is it?

  16. Eric commented on Jun 26

    michange, yes, I see the distinction of correlation and causality. but even then, I would take issue with the statement. whatever else you say about Ken Fisher, he has run a fairly thorough regression between stocks and oil prices and found no statistically significant correlation. he has devoted a couple of his Forbes columns to the subject.

  17. Steve Barry commented on Jun 26

    Two points:

    1) If you recall, I posted on 1/2/08 on this blog, that 2008 would be the worst year in the history of the S&P. I will re-iterate that today.

    2) The blame for the oil situation lies with whoever, and I’m too lazy to research it, decided that an SUV was a truck, and thus exempt from CAFE standards. That one move alone could put us back into the stone ages. The Fed’s easy money has monetized the problem.

  18. mephisto commented on Jun 26

    Gary Savage has been talking about this for months.

  19. VJ commented on Jun 26

    Chief Tomahawk,

    Suddenly Homer’s scam of stealing used cooking grease doesn’t look so dumb. It’s probably cheaper to recycle now.

    It WAS. Everything has spiked in price now:

    Cooking Grease Suddenly Lures Thieves

    Cartoon dad Homer Simpson once came up with a brilliant plan for making a quick buck. A surprising result of the oil crisis is an increase in theft from restaurants. His scheme? Stealing smelly, dirty, used kitchen grease and re-selling it for profit. Now, with average gas prices topping $4 a gallon, it seems life is imitating cartoon.

    That’s because frying oil can be used to make bio-diesel, an alternative fuel that can power cars and other vehicles that driven by a diesel motor. Only two years ago, discarded grease was sold for roughly 75 cents a gallon on the commodities market. Since then, the price has more than tripled to $2.60 a gallon.

    With the gooey stuff now being something akin to liquid gold, restaurants in states from California to Florida are reporting a rise in used-grease thefts.

    ABC NEWS LINK

    .

  20. Euro guest commented on Jun 26

    This is such a correct observation. The importance of it cannot be over estimated. This means that the Yanks are toast. With all the suburbs and exurbs and shit totally dependent on cheap oil.

    The problem is that you dumbasses have a military power that cost more than all other countries combined and you are not afraid to use it. Iraq is a good example. The Iraq situation is of course a result of this dire situation. Forget the rhetoric and the BS that’s for the sheeple.

  21. rj commented on Jun 26

    Larry Kudlow is about to have a heart attack.

    And he’s actually chastising the Fed for not having tough money policies. Can someone put up a link to him stating eight months ago on how great it was that the Fed cut rates?

  22. rj commented on Jun 26

    And Larry Kudlow just used the term “inflation tax”.

    Somewhere, Ron Paul is smiling.

  23. bluestatedon commented on Jun 26

    The drive to relax CAFE standards for both passenger cars and for SUVs was led by the usual gang of suspects. The domestic manufacturers, rightwing pro-corporation/anti-regulation organizations like the Heritage Foundation and the Competitive Enterprise Institute, and Michigan Democrats such as John Dingell have tenaciously fought meaningful mileage requirements for the past two decades.

    The ironic thing is that groups like Heritage and CEI continually yammer that government should not get involved in forcing the automakers to make certain kinds of cars; the almighty genius of the free market would determine what the best cars for consumers were. Fast forward 20 years and here we are: domestic manufacturers caught with their pants down (again) with parking lots full of unsold gas-guzzlers, forced to scramble for their very existence now that the free market is working its wonderful magic again.

    To quote Homer, “D’oh!”

  24. leftback commented on Jun 26

    I don’t buy the argument that the oil price simply reflects the falling $ and ever more voracious world demand. Did another China appear in the last 6 months? Did the $ lose half its value? What if this is simply “safe haven” investing by funds that has created another bubble? If you look back in history there have been many oil price spikes and they all end the same way…

    Eric says the 70s oil price spike was sudden and ‘artificial’. But what could be more artificial than a huge jump in the price of oil because of something unstable in Nigeria (shock, horror!!) or because Libya is jawboning about how they are talking about reducing production (and this just after an increase in US crude inventories) ?

    The exaggerated buying of oil futures in response to recent supply threats and rumours, and the modest selling in response to actual declining demand NEWS is surely characteristic of the very late stages of a bubble, no? Of course this could go on for some time – but not for ever. The law of supply and demand can reassert itself surprisingly quickly as asset classes start to roll over. Nikkei, NASDAQ, US housing, oil at the end of the past price spikes…

    But how can oil prices come down? (hint: astronomical prices cause a fall in economic activity and demand, which will cause a drop in the price of oil, which would decrease imports, which would strengthen the $, which would cause a drop in the price of oil….) this is called negative feedback. It’s simply the opposite of what we have seen since August 2007. When do we flip the switch? I am not sure, but probably sooner than a lot of fund managers are counting on. The only new danger would be another Fed rate cut, which seems to be off the table.

  25. rj commented on Jun 26

    “But what could be more artificial than a huge jump in the price of oil because of something unstable in Nigeria (shock, horror!!)”

    That happens every Tuesday almost, so it can’t really be called artificial.

    “The exaggerated buying of oil futures in response to recent supply threats and rumours”

    Can you agree on this point, if a person buys an oil future, that means that someone is buying an oil shorting future? You can’t buy long unless someone is buying short.

  26. Jessica commented on Jun 26

    Interesting that the one example I can think of of oil soaring with a recession happening would be last year.
    Oil went up quite a ways before the housing debacle actually triggered the recession.

  27. Chief Tomahawk commented on Jun 26

    GREAT find VJ!

    Too bad we’re not bears. If we were, we could hibernate and awake next spring as that is by when the Fed says inflation will “have moderated”.

    Until then I’m afraid The Simpson’s writers will have a whole bevy of headlines to satirize….

  28. Juan commented on Jun 26

    the idea that futures markets are neutral has a following and, on the micro surface, seems very plausible no matter that, as a a form of ‘for every buyer there is a seller’, it is only tautology.

    Two clips from Frank Veneroso’s 2007 WB presentation begin to give some idea:

    Let us go back to the…thesis of Greenspan, Rubin, and Summers; in derivatives, for every long there is a counterparty short, and therefore behavior in the derivative market is price neutral. To be sure ex post there is always a leveraged short to match every leveraged long. But the process is not price neutral. Ex ante the rabid demands of investors and speculators overwhelm the commodity markets and push up the forward price. And it is only that price signal that brings forward the commodity derivatives supply that ex post completes the identity of longs and shorts, supply and demand.

    […]

    The Pollyannas about derivative leverage always emphasize symmetry in the derivative markets: for every long there must be a short, the leverage of the longs must be matched by the leverage of the shorts. But in the commodity markets there is not symmetry of behavior.

    Complete presentation can be downloaded at:
    http://www.venerosoassociates.net/

    The oil price spikes of the 1970s had their bases in politics; they exacerbated but did not cause recessions which had more to do with an avg rate of profit (not earnings) that had begun falling earlier. Aside from that, the first helped mark a definitive shift from a price regime dominated by the major integrated oilcos to one of OPEC administered prices (this latter ended during the mid 1980s, allowing a new form of market related pricing to become dominant).

  29. VJ commented on Jun 26

    And now a view from a different perspective.

    Stephen Schork, president of The Schork Group, consults for major oil firms, OPEC member countries, and hedge funds:

    “This market has been moving in a linear function, but in the last two months a parabola has been drawn into this price path and prices have gone virtually straight up.

    There is no doubt what we are seeing now is long-term bullish prognostications; 2, 5, 10 years down the road are being compressed into the prompt market. This has created a panic. People are moving in this market.

    And it’s — hey, this is nothing unlike what we saw in the dot-com market in the late 1990s. When this bubble bursts — and it will burst — we’re going to go right back to where we started from, below fair market value, below $95, back towards $70, when this all began last August.”

    LEHRER LINK

    If only.
    .

  30. troy commented on Jun 27

    and it will burst — we’re going to go right back to where we started from, below fair market value, below $95, back towards $70

    The only question that needs to be answered is what is the market-clearing price for current production levels.

    1 barrel of oil can be cracked into 20 gallons of gas. $7 gas will certainly cause significant demand destruction, so I agree were are in something of an overshoot at $140. $5 gas though seems to me to be equilibrium for consumers here in the states.

  31. Rock commented on Jun 27

    http://www.wtrg.com/oil_graphs/oilprice1947.gif

    “What is the relationship of oil and recessions prior to the 1970’s?”

    Looking at the oilprice1947 chart, it appears that oil price didn’t hardly move at all from 1947 to 1973.

    http://en.wikipedia.org/wiki/List_of_recessions

    You can draw your own conclusions, but intuitively, it seems obvious that when gasoline prices go up noticeably, people cut back their spending untill they “adjust”

    I’m going to go out on a limb and say we would have had the recession earlier, but with home prices skyrocketing, credit card skyrocketing, and cheap money, the consumer wasn’t feeling as squeezed. Now he is.

  32. Juan commented on Jun 28

    Rock,

    The relative lack of volatility which you see prior to 1973 has to do with the structure of the international oil industry, i.e. its dominance by the so-called ‘seven sisters’ who practiced a type of oligopoly pricing which developed out of the 1928 Achnacarry and Red Line Agreements. Here in the U.S., the Railroad Commission of Texas, with its regulatory control of pipelines and production, played a part from 1917-19 into the 1970s.

    The ending of the above was to large part brought about by industry’s failure to sufficiently compensate the oil reserve nations. Tensions between major integrate oilcos and national govts helped give rise to OPEC which, in consequence of U.S. and others support for Israel in the 1973 Yom Kippur war, enacted an embargo against certain nations. This was the first oil ‘shock’; the second, in 1979, was related to temporary loss of Iranian production due to the Iranian Revolution.

    Deep double slump recession here in the U.S. and most other developed nations brought a multi-year decline in demand just as a number of non-OPEC producers had been ramping up. Global oversupply helped create tensions among OPEC members that, while not ending the cartel, effectively ended its ability to administer price.

    OPEC price administration shifted to formula pricing and futures markets; what has been called ‘market related’ pricing since price is not formed directly through the physical trade but indirectly within financial markets that, imo, have ceased to properly function.

Posted Under